Investing Themes In A Volatile Market – Cramer's Mad Money (1/31/18)

Cramer started the show by talking about the method of investing in a volatile market. “You need to have a list where you can say, ‘That’s it, my buy price has been hit. Time to pull the trigger.’ This way your decision-making process is bloodless and unemotional. You’ve already made the call during a calmer, non-battle-oriented moment; you’re just waiting for lower prices to give you a better entry point,” he said. Major institutional managers are moving in and out of stocks based on data points that may not be accurate. Yet those moves are big enough to make swings in stocks.

The concerns of rising treasury rates, future of healthcare costs led to big rotations which caused market volatility. Cramer said that the best way to invest on a volatile day is to get behind secular growth themes that work in any environment irrespective of the market action. He gave 4 such themes that are working now:

Aerospace: The rising global demand for airplanes makes aerospace one of the hottest themes. The middle class is expanding and air travel is increasing and that is why the airlines are increasing capacity. This makes Boeing (NYSE:BA) a hot pick and the stock had gone down going into the earnings. “What happened next is a classic example of the rigorous nature of thematic investing: Boeing reported today and it was an astounding quarter and the stock zoomed up,” said Cramer.

Gaming: As the ‘stay-at-home’ economy grows, gaming gains traction. Good earnings from Electronic Arts (NASDAQ:EA) led to the gaming group rallying.

Defense: The geo-political environment and Trump’s push to increase defense spending makes this theme a no-brainer. As the military spending gets aggressive, any weakness in defense stocks is a buying opportunity.

Cloud: This is a secular growth theme for the long term. As many companies are moving their systems to the cloud and also betting big on data and analytics, buying major cloud plays like Salesforce (NYSE:CRM), Workday (NYSE:WDAY) and ServiceNow (NYSE:NOW) is a good idea. He added that tools of the cloud stocks like Adobe (NASDAQ:ADBE) and VMWare (NYSE:VMW) and chip makers who support the growth of cloud like AMD (NASDAQ:AMD) and Intel (NASDAQ:INTC) are good buys too.

“While nothing is risk-free, these are stocks, for heaven’s sake. They’re just pieces of paper. You’ll do a lot better if you embrace my shopping list method so you’re prepared the next time we get a flash sale,” concluded Cramer. He recommended buying stocks gradually on their way down.

State of the Union address

Cramer analyzed Trump’s State of the Union address and gave his stock picks that are likely to benefit from the address. “It’s ironic, but this president does, indeed, know what the stock market wants from him: it wants cheerleading, more defense dollars, less regulation, especially when it comes to big business, and, of course, lower taxes,” said Cramer.

Defense stocks were the obvious winners as Trump called for higher military spending. “Suggested buys? Lockheed Martin (NYSE:LMT) off the fighter jet franchise, Harris (NYSE:HRS) for the radio and communications business and Raytheon (NYSE:RTN) for Patriot missiles, which our allies can’t get enough of,” said Cramer.

Infrastructure stocks were next on the list as Trump called for Congress to push an infrastructure bill for repairing the “crumbling infrastructure”. If Trump gets this done, Caterpillar (NYSE:CAT) and United Rentals (NYSE:URI) will be big beneficiaries. Cramer added that industrial steel producer Nucor (NYSE:NUE) will also gain from the rise in infrastructure spending.

Healthcare

The selloff in healthcare is not an immediate buying opportunity per Cramer. However, two stocks are exceptions to this rule as they reported stellar results – AbbVie (NYSE:ABBV) and Biogen (NASDAQ:BIIB).

AbbVie is up 83% in the last 12 months and yet it’s a good buy thanks to its consistent growth. AbbVie is branded as a slow and steady drug maker and yet it delivered strong revenue growth of 14% and earnings growth of 32%.

Biogen, on the other hand, missed earnings but is still a strong buy on forward guidance and revenue growth. The company is in Phase II for three of its drugs and the future looks bright for Biogen.

However, not all drug makers are good buys. Eli Lilly (NYSE:LLY) is a classic example of a large cap drug maker that is struggling to find growth.

It has been a tough year for insurance. Cramer interviewed Chubb CEO Evan Greenberg to find out what lies ahead for the insurance provider after it reported good earnings in the last quarter.

Greenberg said that after a tough year for insurance, business is starting to improve after two hurricanes and rampant wildfires. “The rates are responding in areas with deficient pricing.”

The most important aspect of their growth was their merger with ACE Ltd. “We exceeded our initial expectations by a mile on efficiencies and cost take-out, but it’s really about one plus one equals three. We are growing faster today than I believe the two companies left on their own would,” added Greenberg.

The combined strength of the two companies has led to better product capability, service strengths, geographic reach and distribution excellence. Even with not being the cheapest insurance, customer satisfaction is rising.

Greenberg also commented on insurance risk from climate change by saying, “As long as we can be paid properly and we can understand the risk and we can structure the risk, we will assume that risk. As climate change becomes a greater reality and we have more volatility and as society becomes more affluent, urbanizes more, then there’s greater concentrations in exposure. That’s the insurance industry’s job if we want to remain relevant.”

ADP had yet another good quarter with earnings growth and rise in guidance. Cramer interviewed president and CEO Carlos Rodriguez to hear more about the quarter and the proxy fight with activist investor Bill Ackman.

“It’s all water under the bridge. We listened very carefully to what Bill had to say. In fact, I’ve been in touch with him, so we have, I think, what I would call a collegial and professional relationship,” said Rodriguez. The battle came to an end when Ackman lost a vote for a seat on the board.

“I don’t think there’s any disagreement about the potential that ADP has. It’s really about pace. You can always move a little bit faster, so there’s nothing wrong with someone pushing us to move quicker and have a little more of a sense of urgency,” he added.

Rodriguez said that the good earnings speak for themselves and it proves ADP is on the correct path. “As a matter of fact, he did call to congratulate me. I think it’s a good, productive relationship now.” He added that the current economic environment is good for the company as the largest payroll processor.

“The nature of the workforce is changing and gig workers are one of the factors. The most popular image that people have of that is Uber and people kind of working on the side, but it’s really across the whole economy. There’s approximately 35M people who work as independent contractors or get a 1099, and they need help in terms of compliance, they need help with managing their finances, and the employers who use them as independent contractors need that help as well. So it opens up a whole new market for us in addition to the W-2 employees, which are our traditional source of business,” concluded Rodriguez.

Viewer calls taken by Cramer

Under Armour (NYSE:UAA): No. Nike (NYSE:NKE) is doing much better than Under Armour.

Kratos Defense (NASDAQ:KTOS): Add to the position as it goes down, although Lockheed Martin (LMT) is a high quality name.

EPR Properties (NYSE:EPR): They are levered to the movie business which is on a decline. All the REITs are going down but Cramer suggested holding on to the stock and perhaps buying more when it yields 8%.